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There are many changes that occurred in the industrial organization of
interexchange telecommunication services in the United States during the
1985-1995 period. Letís look at the general idea of Telecommunications. It is
the two-way exchange of info in the form of voice or data messages between tow
users at distinct geographic locations" (5, 7). The two-way exchange is now a
numerous way exchange through the use of computers and the Internet. There are
four important areas of the telecommunication industry in the United States.
Technology plays a major role in telecommunications. Before technology, there
was no such thing as telecommunications. During the ten year period there are
some key advances in telecommunications due to technology. With growing
technology, more companies want a piece of the action. There is a significant
increase in long distance carriers and an increase in the size of these
carriers. There is also a large influx in pricing and competition during this
period. Another key factor in the success of the telecommunication industry is
the regulations established for individual carriers and the industry as a whole.
With the increasing size of the industry and the major technological advances,
stricter regulations must be present to keep the structure of the industry.
Lastly, there are some differences between local and long distance carriers that
must be looked at to fully understand the industry. There is also a fifth major
aspect that defines Telecommunications, that is the American Telephone
&Telegraph Company (AT&T) and the history behind it. Technology is a key
aspect in the growth of telecommunications. If one had to point to the single
most important reason for the new competition in local telephone markets. It is
the advance of technology. Digitalization has reduced barriers between voice
telephone, data, and media services (9, 29). Microprocessors are the principal
component of digital switches. So as their performance increases and their price
falls, switching costs fall and scale and scope economies increase (9, 13).
Scope economies mean that a few companies produce many services. The adoption of
digital technology in all aspects of the network has improved performance and
lowered costs. Digital transmission, whether over copper of fiber cables or over
the airwaves, is cleaner and more secure due to more durable cables(9, 16).
Technological advances such as fiber optics and wireless transmission have paved
the way for competition in the local exchange. But, new technology alone could
not bring competition to the local exchange (9, 10). It takes innovations in
communications technology and new service offerings pressure both suppliers and
industry regulators to change (9, 2). In 1984, there was a large growth in the
size of the industry and of its respective business. Teleport offered
competitive local business services in New York City (9, 9). Competition is met
with aggressive responses, including price cuts and improved service offerings.
The new competitiveness effected rates and offerings of local exchange carriers
in years to come. In particular, the integration of local, long distance,
cellular and cable services establishes the groundwork for offering innovative
service packages at Bundled Rates (9, 11). Two factors are most important for
the relative advantages of the various new competitors: The incremental costs of
building local telephone networks and the pre-existing goodwill with potential
subscribers (9, 37). There were gains and mistakes made by several competitive
firms during this period. Instead of divesting itself, Ameritech proposed to
interconnect with competitors and unbundled its network services selling
services at nondiscriminatory cost-based rates (9, 11). They were trying to be
competitive in a world of monopoly. In 1994, MCI decided on a strategy to build
its own local networks in selected cities for selected customers. Problems
struck when they could not reach households. It proved to be very expensive and
MCI quietly scaled back its plans. MCI then decided to grow internally by
creating its MCImetro division (9, 11). These firms were trying different
approaches to compete with AT&T after the divesture. The cost wars during
the period also had an affect on companies entering the market. Since average
costs are everywhere declining, strong scale economies prevail. Scope economies
occur when a single firm can provide an entire array of services more cheaply
than a collection of firms who specialize in just a few of those services. Scope
economies stem from the joint use of facilities by several services without
substantial congestion problems. Costs of local exchange service is "sub
additive" which requires the cost of a given level of local services when
supplied by a single firm is less than when parceled out to two or more firms.
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